Sticking with known directors (regardless of performance)?

4 minute read 27.10.2020 Kate Hilder, Mark Standen

Ownership Matters has identified a tendency for ASX 300 directors to be drawn from the existing pool of serving directors, regardless of their performance. This has prompted Ownership Matters to question the effectiveness of the current approach to board recruitment and board refreshment from a shareholder perspective. Our key takeaways from the report are below.

Key takeouts

Ownership Matters has released a report entitled, Many are called, few are chosen, tracking ASX 300 board appointments and departures, tenure, gender composition and company performance, based on data over the 2005-2020 period.
Key findings include that: a) new director appointments tend to be drawn from the existing pool of ASX 300 directors (seemingly) regardless of their previous record; b) boards have become more gender diverse, but female directors are 'disproportionately' more likely to be appointed from among the pool of service ASX 300 directors; c) the more seats a director holds, the longer their tenure is likely to be; and d) average director tenure tends to be 'lengthy' and appears unrelated to company performance.
The report questions, in light of this, whether the current approach to board refreshment/performance assessment is in the best interests of shareholders.

Overview

Ownership Matters has released a report tracking the composition of ASX 300 boards together with share price returns during the period of director service, over the period 2005-2020.

A headline conclusion of the report is that boards tend to prefer 'known' candidates (candidates who already hold an ASX 300 board seat) seemingly regardless of the directors' prior record/effectiveness. This appears to be especially true of female directors, who the report found are 'disproportionately' more likely to be recruited from within the existing pool of ASX 300 directors.

In addition, the report found that based on high average endorsement rates – according to the report, non executive directors standing for election/re-election receive an average vote of 96% in support - shareholders are reluctant to vote against incumbent non-executive directors regardless of continued underperformance in the companies they serve.

The report suggests that based on the findings in the report, investors should ask questions about whether the current approach to director recruitment and board refreshment are best serving their financial interests.

'Investors should question whether the current systems used to select boards preference incumbent ASX 300 directors, irrespective of gender, at the expense of other merit-based candidates. Our analysis presents evidence that NED tenure is lengthy and that board turnover in the last 15 years is largely independent of company performance. If a high performance culture does not exist in the board, investors should ask how one can prosper within the company’s workforce?'

Some interesting findings

Boards have become more gender diverse, but female directors tend to be drawn from the pool of serving ASX 300 directors

Uptick in the number of female directors: Women account for 33.1% of ASX 300 board seats as at 30 June 2020, up from 9.6% in 2005.
The number of female executive directors has remained flat over the period: According to the report there are currently more executive directors named either Michael or Mark than all women in executive director roles in ASX 300 companies. Women account for only 6% of executive director roles, a figure that has remained virtually unchanged over the period.

Director appointments

Since 2005, close to 40% (38.2%) of directors were recruited from the pool of directors who already hold at least one ASX 300 board seat. In the year to 30 June 2020, 36% of directors were appointed from among the existing ASX 300 director pool.
The report found that women are 'disproportionately' more likely to be appointed from within the existing ASX 300 director pool than their male peers. For example, during the 3 years to June 2020 approximately 40% of the existing pool of women directors accepted an appointment to an additional board (generally a smaller company) whereas for men, during the same the same period, the level was 17.5%.
According to the report, over the last three years the pool of women who are selected as first-time candidates to be ASX 300 directors is not growing at the same rate as the opportunity for women to be ASX 300 directors.

Director workload

Women directors are serving on (slightly) more boards than they have in the past, while men are serving on (slightly) fewer. According to the report, women were serving on 1.3 boards each in 2009 as compared with 1.45 seats now. In contrast, in 2009 men served on 1.23 seats, declining to 1.18 now.
5% of all female directors hold four or more board seats. In contrast, 16 men or 1.7% of male directors hold four or more board seats. However, when adjusted for the increased workload of chairpersons (assuming one chair is the equivalent of two board seats) this changes: 65 men have a workload of four or more board seats, compared to twenty-eight women.

Tenure

The report found that overall, gender makes little difference in terms of board tenure up to the ten year mark. However, directors have been in their roles for over ten years, this changes. As at 30 June 2020, 18% of male non executive directors (208 in total) had been in their roles for more than ten years. In contrast, only 2% of female non executive directors fall into this category.
The report identified a 'strong association' between the number of board seats held by individual directors and time served as a director (overall) on ASX 300 boards. That is, the more seats a director holds, the longer their tenure is likely to be. Non executive directors that have at least one appointment as a Chairperson have an average ASX 300 service that is just over 4 years longer than non-executive directors without a Chairperson appointment.
Directors who serve on companies with larger market capitalisation are more likely to have multiple board commitments.

The link between board turnover and financial performance

The report comments that there is 'little meaningful difference in the board turnover rates between companies that outperform compared to those that underperform'.

Turnover of all ASX 300 board seats regardless of the financial performance of the company has averaged 12.75% per year over the last 15 years. The rate of board turnover at the worst financial performers (ie companies that recorded total shareholder return in the bottom decile of the ASX 300 in any year between 2005-20) was slightly higher with an average of 19% of board seats turning over the year after the very poor performance was recorded.
Financial performance appears to have little impact on director retirement: The report found that an individual director serving on a company that recorded total shareholder return in the bottom decile of the ASX 300 in any year between 2005-20 had a 21% chance of retiring the following year (17% for chairpersons) as compared to an average 14% chance of retirement across all other performance deciles (10% for chairs).
The report comments that based on the strong endorsement rate – non executive directors standing for election/re-election receive an average vote of 96% in support - shareholders are reluctant to act against incumbent non executive directors regardless of continued underperformance in the companies they serve. The report suggests that this could be due to various factors including: a) lack of specific/useful information about individual director aptitude/effectiveness/contribution; and b) the fact that Australian directors do not face annual elections as they do in the UK.